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Sunday, 20 October 2013

Exchange Control and the Shuttleworth Decision

Background

Mr Shuttleworth realised substantial proceeds on the
disposal of his business, having realised approximately R4,2 billion, and
decided to emigrate from South Africa on 23 February 2001. As a result, the assets located in South
Africa were blocked.

In order to remit
the funds from South Africa, Shuttleworth was required to pay a 10% levy to the
South African Reserve Bank of R250,474,893.50.
This was not the first time that Shuttleworth had to pay a 10% levy for
wanting to take assets out of South Africa.

Under the rules in place governing exchange control, he was required to
submit an application to transfer his blocked assets out of South Africa via an
authorised dealer, that is, a commercial bank authorised to deal in foreign
exchange, and submitted an application via his bank, namely, Standard
Bank.

In submitting the application to
remit funds from the country, he requested Standard Bank to place before the
South African Reserve Bank a document that he had prepared containing certain
representations regarding his application.
Standard Bank omitted to place before the South African Reserve Bank the
written representations prepared by Shuttleworth, and, when that was
discovered, he instructed Standard Bank to place those representations before
the South African Reserve Bank for it to reconsider its position regarding the
imposition of the 10% levy.

Subsequently, the South African Reserve Bank confirmed its earlier
decision taken on 13 October 2009, whereby it imposed the 10% levy
on the funds Shuttleworth wished to remit from South Africa.

Shuttleworth subsequently requested reasons for the
decisions to impose a 10% levy, and the South African Reserve Bank responded to
that request by pointing out that the Minister of Finance’s Budget Speech of 26 February 2009 contained details whereby emigrants’ blocked assets were to be
unwound and that amounts of up to R750,000.00 will be eligible for removal from
South Africa without charge.

It was
indicated that those emigrants who wished to remove more than R750,000.00 from
South Africa would have to apply to the Exchange Control Department of the
South African Reserve Bank for approval and will be subject to an exiting
schedule and an exit charge or levy of 10% of the amount removed from South
Africa.

Shuttleworth sought relief from
the Court(MR Shuttleworth v South African
Reserve Bank and Others, Case No 307 09/210, North Gauteng High Court, as
yet unreported) that the 10% levy paid by him was unlawful and should be
returned to him and that certain provisions of the law and the regulations
regulating exchange control did not comply with the Constitution of the
Republic of South Africa, Act 108 of 1996, as amended, and should, therefore,
be found to be unconstitutional.

Currency and Exchanges
Act of 1933

It is appropriate to point out that the legal framework
regulating exchange control in South Africa flows from the provisions of the
Currency and Exchanges Act, No 9 of 1933, and the regulations, rules and orders
which have been issued in terms of that statute. It is thus clear that the Currency and
Exchanges Act was enacted long before the dawn of the constitutional democracy
in South Africa and the Bill of Rights contained in the Constitution.

The Currency and Exchanges Act was introduced to amend the
law relating to legal tender, currency, exchange and banking. It also creates a framework regulating
exchange control and has thus been in place on the statute books for many
years, and did not originate, as is often thought, after the aftermath of the Sharpeville
massacre in 1961. The legislation was
designed in such a way that it can be amended quickly and easily by way of the
issue of regulations in order to address developments in the economy and the
currency markets quickly so as to protect the South African currency.

The legal challenge

Shuttleworth sought an order reviewing and setting aside the
decision of the South African Reserve Bank taken during 2009 to impose a 10%
levy as a condition permitting the transfer of his remaining blocked assets out
of the Republic. Shuttleworth,
therefore, sought a refund of the levy paid of R250,474,893.50, together with interest
thereon.

Furthermore, he sought an order declaring that the words
“and an exit charge of 10% of the amount” used in Exchange Control Circular No
D375 of 26 February 2003, and Exchange Control Circular No D380 of
26 February 2003 and section B2(E)(iii)(e) of the exchange control
rulings were at all material times inconsistent with the Constitution and,
thus, invalid.

In addition, Shuttleworth sought an order declaring that
section 9 of the Currency and Exchanges Act is inconsistent with the
Constitution and invalid, and in the alternative sought an order declaring that
certain specific sub-sections of section 9 of the Currency and Exchanges Act
are invalid.

The order requested the Court to declare
certain paragraphs of regulation 3(1) of the exchange control regulations to be
inconsistent with the Constitution and thus invalid, and that regulation
10(1)(b) of the exchange control regulations was invalid, together with an
order declaring that regulations 18 and 19(1) of the Exchange Control
Regulations are inconsistent with the Constitution and therefore invalid.

Shuttleworth also sought an order directing that parts of regulation
22 of the exchange control regulations were inconsistent with the Constitution
and thus invalid, as well as the orders and rules issued under the exchange control
regulations were inconsistent with the Constitution and thus invalid.

“Closed-door Policy”

Currently, under existing policy, persons wishing to seek
approval from the South African Reserve Bank regarding transactions dealing
with foreign exchange are required to communicate with the South African
Reserve Bank via authorised dealers.

Shuttleworth sought an order that the policy of the South African
Reserve Bank to refuse dealing with members of the public directly in the
exercise of its delegated powers under the exchange control regulations was
inconsistent with the Constitution and therefore invalid.

It is therefore not possible for a person
seeking approval under the exchange control regulations to engage with the
South African Reserve Bank directly, but is required, under the regulations, to
approach the South African Reserve Bank via their own commercial bank. In the judgment, this was referred to as “a
closed-door policy” and the Court had to determine whether that process was
procedurally right and fair.

Mootness of proceedings

The South African Reserve Bank raised the question whether
the proceedings before the Court are academic or moot, in light of the decision
by the Minister to do away with the 10% levy on blocked assets or funds.

In considering this question, the Court
looked at the merits and historical background to the exchange control system
in South Africa, and pointed out that it is important that the authorities are
able to react quickly and without delay to changes in the international
monetary system, which is achieved via the current structure in place of
empowering an official to issue regulations, which has been a central feature
of exchange control in South Africa since 1933.

The Exchange Control Department of the South African Reserve
Bank was subsequently replaced by the Financial Surveillance Department and
exists in order to protect the value of the Rand in the interests of a balanced
and sustainable economy in South Africa.

The purpose of the Financial Surveillance Department within the South
African Reserve Bank exists in order to regulate the inflow and outflow of
capital in terms of the powers granted to it by the legislature. The Financial Surveillance Department also
comprises an investigations division, which is required to investigate alleged
contraventions of the exchange control regulations and to recoup losses
suffered insofar as the country’s foreign currency reserves are concerned.

The judgment contains a useful summary of the inception of
exchange control in South Africa and the refinements made thereto over the last
number of years.

The Court held that the issues raised by Shuttleworth were
not academic or moot and that he had an interest in the Court ruling on those
issues and, in addition thereto, it was in the public interest that the issues
raised in his challenge on the various regulations and sections of the statute
regulating exchange control should be considered by the Court.

The regulations, orders
and rules governing exchange control

The primary legislation regulating exchange control is,
therefore, contained in the Currency and Exchanges Act of 1933, and, in
accordance

Mark Shuttleworth

with that statute, regulations governing exchange control may be
promulgated.

Furthermore, the Minister
of Finance is empowered to issue orders and rules under the exchange control
regulations which contain various orders, rules, exemptions, forms and
procedural arrangements. Regulations may
be issued by the Minister in terms of section 9 of the Currency and Exchanges
Act and, furthermore, the Minister of Finance can further delegate such duties
or powers to any person in terms of regulation 22E of the exchange control
regulations.

Thus, the furnishing of
information or advice on exchange control or currency matters are matters
governed by the regulations and, similarly, the approval or permission in respect
of exchange, currency or gold transactions are also governed by the
regulations.

Shuttleworth sought to
argue that the requirement that members of the public must approach the South
African Reserve Bank via their bankers was contrary to the obligations imposed
on the public administration by section 195 of the Constitution, as well the
foundational values of accountability, responsiveness and openness of section 1
of the Constitution.

The South African
Reserve Bank pointed out that the exchange control rulings are amended from
time to time by way of exchange control circulars and are made available to all
authorised dealers and that the contents thereof may be made available to the
public.

In addition, the Exchange
Control Manual is published by the South African Reserve Bank on its website as
a general guideline for the public in an attempt to provide a general
understanding of the purpose, scope and operation of the exchange control
system.

It was pointed out that the
majority of applications for permission to carry out transactions fall within
the scope of rulings and are dealt with by the authorised dealers. In the judgement, it was indicated that in
2010, a total of 10,147,090 foreign exchange transactions took place, of which
the Exchange Control Department only received approximately 54,000 applications
from all recognised authorised dealers.

It was therefore argued that the authorised dealer system allows for the
sifting of applications such that the South African Reserve Bank is only required
to deal with those applications which fall beyond the scope of authority
granted to authorised dealers.

In the result, the Court found that the so-called “closed
door policy” was lawful and complied with the Constitution.

In addition, the Court declined
Shuttleworth’s request to direct that the 10% exit levy paid by him be refunded
on the basis that the exchange control circulars issued were valid and did not
violate the Constitution.

The decision
to impose the 10% exit levy was not made by the South African Reserve Bank
itself, but by the Minister of Finance, who had the authority to make such
decision.

Shuttleworth sought to argue
that the regulation imposing the 10% levy had not been approved by Parliament,
but this argument was rejected by the Court on the basis that the regulation
did not constitute the making or promulgation of a regulation intended to raise
revenue or tax as envisaged in section 9(4) of the Currency and Exchanges Act
but was, rather, a measure to protect the currency of South Africa.

The Court accepted that the 10% exit levy was imposed as a
means of restricting the export of capital from South Africa and that the levy
was valid under the Constitution, and, therefore, refrained from directing that
the levy paid by Shuttleworth be refunded.

Court’s decision on
the other challenged made by Shuttleworth

The judgment deals with the various challenges made by
Shuttleworth insofar as various regulations and sections of the Currency and
Exchanges Act are concerned and these are summarised in the table set out
below:

Section of Currency
and Exchanges Act or Regulation challenged by Shuttleworth

Court Decision

1

Section 9

Dismissed

2

Sections 9(2)(a),(c) and (f)

Dismissed

3

Section 9(3)

Granted – subject to confirmation by Constitutional Court

4

Section 9(5)

Dismissed

5

Exchange Control Regulations in their entirety

Dismissed

6

Regulation 3(1)

Granted – subject to rectification within twelve months

7

Regulation 3(1)(a) to (c)

Granted – subject to rectification within twelve months

8

Regulation 3(3) and 3(5)

Granted – subject to rectification within twelve months

9

Regulation 10(1)(b)

Granted – subject to rectification within twelve months

10

Regulation 18

Dismissed

11

Regulation 19(1)

Granted – subject to rectification within twelve months

12

The wording in Regulation 22 “unless he proves that he did
not know, and could not by exercise of reasonable degree of care have
ascertained that the statement was incorrect”

Granted and words in issue struck down

13

Orders and rules under exchange control regulations

Dismissed

Cost Order

The Court pointed out that the issues raised in the
proceedings are important from a constitutional point of view. The decision of the Court was not only of
importance for Shuttleworth, but also for the South African Reserve Bank and
the Minister of Finance. Ordinarily, the
Court directs that the costs shall follow the outcome of the decision, and, in
the Shuttleworth case, the Court ordered that each party must each pay his or
her own costs.

Exchange Control Circular
No 19/2013

On 2 August 2013, the Financial Surveillance Department of
the South African Reserve Bank issued the abovementioned circular in response
to the judgement handed down in the North Gauteng High Court in the matter
between Mr Shuttleworth and the South African Reserve Bank and others.

The circular summarises the decision of the
Court, and points out that the Court rejected Mr Shuttleworth’s contention that
the exchange control system as a whole and the legislation and regulations
which comprises the system are unconstitutional.

The exchange control circular issued on 2
August 2013, therefore, informs authorised dealers that the effect of the
judgment of the Court is that the exchange control system and the
administration thereof remains unchanged.

The circular confirms that the Court declared section 9(3)
of the Currency and Exchanges Act constitutional, and that that declaration is
subject to confirmation by the Constitutional Court.

Furthermore, as pointed out above, the Court
also declared certain regulations unconstitutional, which declaration of
invalidity has been suspended for twelve months.

The South African Reserve Bank advised all
authorised dealers to note that the provisions in question remain of full force
and effect until the matter has been finally adjudicated by the Constitutional
Court in terms of section 172 of the Constitution.

Conclusion

It has been reported in the media that Mr Shuttleworth has
decided to seek leave to appeal the decision handed down by Legodi J, and it is
therefore likely that the case will proceed to a full bench of the North
Gauteng High Court and, ultimately, to the Constitutional Court for final
adjudication.

It is clear that certain regulations governing exchange
control have been found to be wanting and that sections of the Currency and
Exchanges Act must be refined in order to comply with the Constitution.

This does not come as a surprise, taking
account of the fact that the Currency and Exchanges Act was enacted in 1933,
that is, long before the Bill of Rights and the dawn of the democratic era of
constitutional supremacy in South Africa.

(NOTE in Without Prejudice: On September 17, 2013, the North Gauteng High Court granted Mr Shuttleworth leave to appeal and granted the Reserve Bank leave to cross-appeal)